remember: only forward deltas sums up to 1. Quoting delta-vol-term is standard on FX. You can then construct all vol surfaces from it, as well as convert it to strike-term vol surface.
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AB_Mar 3 '13 at 16:10

7 Answers
7

Delta is the partial derivative of the value of the option with respect to the value of the underlying asset. An option with a delta of 0.5 (here listed as +50 points) goes up \$0.50 if the underlying asset goes up \$1.00. Or goes down \$0.50 if the underlying asset goes down \$1.00. Keep in mind that delta is an instantaneous derivative, so the value will change both in time (charm is the change in delta with time) and with changes in value of the underlying asset (gamma is the change in delta with the underlying asset, which is also the second partial derivative of the option value with respect to the underlying asset value).

The actual delta is a little different from +50, +25, and so on, but they're close enough. I am sure that you can find the real delta values. I guess they're listed like this because if you're hedging a portfolio you really care about the delta, not the strike. E.G., if I only wanted to delta hedge, and owned one share, I could buy two -50 delta puts, which sum to a delta of zero.

deltas represent hedge ratio; ie/ 5%, 10%, 25%...ie/ buy 2 50 delta puts, buy 100 shares of stock for perfect hedge at price done. delta volatility "smile" should be represented with the smallest delta having the highest volatility to the largest delta having the smallest volatility...being the at the money option..struck at the price of the stock. 50 delta put on $100 IBM is 100 strike. Buy 2 50 delta puts, sell 100 shares IBM at $100. Higher volatility options have less chance of ending up in the money at expiration. easy way to think of this is 5 delta has 5% chance of ending up in the money at expiration. Instead of hedging with the underlying contract, lower deltas can be offset by selling other options against...buy 2 5 deltas and sell 1 10 delta against it.

The question may be motivated by the way closing implied volatilities are reported for LME traded third wednesday prompt metals contracts. Function LMIV on Bloomberg provides vol quotes for 50 delta options and corresponding premiums/discounts for 10, 25 delta puts and calls.

LME metals futures are really forward contracts with constant maturity forwards being electronically quoted for various terms (e.g. LMCADS03 Comdty for 3 month copper). Most of the liquidity is clustered in the third wednesday prompt contracts for which there are no continuous electronic quotes (at least not on Bloomberg) and which thus are frequently quoted by premium/discount from the nearest forward contract.

Quoting prices in delta makes it easier for a trader to delta hedge their portfolio.
(The trader knows teh delta they are trying to add or cut, so the price quoted in delta gives them the contract qty that they need to trade quickly, without needing a calculator, let alone a pricing model)

I'm going to disagree with richardh here, since it seems unusual to
quote options with 10% delta.

Instead, I think "+25 POINTS" means an option whose strike price is 25
points above zinc's current March 2013 futures price (not zinc's current spot price). In other words, an option that's 25 points out of the money (I'm assuming these are calls).

Quoting option prices this way is much more stable. The price of an
option on X with a fixed strike price varies as X's price
varies. However, the price of an option with strike price X+25 is
relatively stable (since X+25 itself varies with X).

Similarly, option volatility follows a "V" pattern when plotted
against strike price (the "volatility smile"), with the lowest
volatility when the strike price is equal to the current
price. Therefore, you only need 4 volatilitys (2 on each side of the
current price) to obtain the volatility-vs-strike-price graph. I'm not
sure why they give you 5 (and why the 5th one isn't zero delta).

To be absolutely pedantic, Black-Scholes looks at Log[strikeprice/currentprice], not strikeprice minus currentprice. However, if the
strike is close to the current price, these two numbers are
nearly equal.

+1 -- These are excellent points! So it's very possible. I don't have any experience with this exchange and it's something that the OP should check out. My answer is really more general about how someone would quote delta on a typical equity option. Thanks for the lesson!
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Richard HerronFeb 10 '11 at 2:58